Where to Invest in the Next Five Years
David Christianson, CFP, R.F.P., TEP
For decades, many investment advisors have recommended that clients diversify outside of Canada.
There were many good reasons for that – better diversification, reduced volatility (from matching up asset classes whose returns had low or negative correlation), accessing the other 95% of world stock market capitalization that is outside Canada. No one wants to miss out on a world of opportunities.
There was a time when research suggested that the proper mix was a minimum of half foreign equity investments, and only half Canadian.
For decades this paid off nicely. Our resource sector went through the 70’s and 80’s with minimal share value increases.
Mining and oil company shares only started to rise significantly in 2000, after the technology bubble burst. That’s when the Canadian market turned a significant corner and became one of the hottest in the world, accompanied by a rising Canadian dollar. (Ironically, this was immediately after the government decided to eliminate the foreign content restriction on RRSPs.)
From 2001 to early 2008, soaring commodity prices lifted Canada’s resource sector up many fold. At the same time, Canada’s financial sector rose along with the rest of the world’s banks and insurance companies. As well, other Canadian industrial sectors had world-class champions, like RIM in technology and Potash Corp. in agriculture.
All stock market trends were interrupted by the crash of 2008, but with markets showing signs of normalcy, where does this leave us now, and what of the future?
It has been clear to us for a while that future world economic growth is going to be led by the developing countries, not by mature markets like the US and Europe. Do your own research into how many people in India and China are moving from the country to the cities every day, and the resulting huge volume of construction and insatiable demand for resources.
We all know that manufacturing activity has been moving to Asia for many years, and this is accelerating. Those jobs are creating a consuming middle class that is growing at something like Canada’s total population every year.
So if India, China, Brazil and other developing countries are expected to lead in economic growth for the next two decades, does that mean we should make all of our future investments in emerging markets?
We won’t be doing this, as the high volatility in those stock markets is more than most of our clients want to experience.
What we will be doing is taking advantage of that growth by investing in the companies who are providing the raw materials, engineering and other expertise, and even technology to facilitate that explosion of growth in the developing world. Many of those are Canadian companies.
We won’t abandon foreign investments, but we will be focusing more on Canadian stock investments than in the past. This has the added benefit of reducing the negative effect of a rising Canadian dollar.
If you share this thesis, or want to know more about it, pick up a brand new book called Shell Shocked, by John Stephenson. It is subtitled How Canadians Can Invest After the Collapse.
Stephenson is a portfolio manager in Toronto, but he started his career with Enron, giving him a behind-the-scenes look at how the financial system “really” works. This book is a well-researched, well-written summary of why Canada is the place to invest right now. (For the opposite point of view, read Why Your World is About to Get a Whole Lot Smaller by Jeff Rubin.)
Mr. Stephenson provides facts on why the future belongs to Asia and not America, and makes the case for investing in companies that own & produce resources & commodities, as expected. But he also shows why buying banks, gold, technology & infrastructure companies, and even real estate, food and water, can be great opportunities in the years ahead.
However, the author wisely tempers his enthusiasm with warnings that the economic and stock market recoveries could be slow and that future economic expansion is dependent on continued free trade between nations. Recovery could be stifled – as it was in 1930 – by new protectionist measures introduced to satisfy voters.
I recommend the book, published by John Wiley & Sons Canada, as an accurate, though simplified, summary of how we got where we are now, and how to take advantage of opportunities presented by the downturn.
(But, as I always say to devoted followers of this column, don’t believe everything you read.)
* * *
David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column, ‘Dollars & Sense’ appears Fridays in the Winnipeg Free Press.